Hapvida Participacoes e Investimentos SA

BOVESPA:HAPV3

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, and thank you for standing by. Welcome to the conference call to announce the results of the fourth quarter for Hapvida. Here with us, we have Jorge Pinheiro, CEO, Mauricio Teixeira, Finance VP, Marcelo Moreira, Vice President for Strategy, Investor Relations; and Guilherme Nahuz, Director for Investor Relations. [Operator Instructions] This conference call is being recorded and will be available at the company's Investor Relations website, along with the full materials of the results. You can download the presentation, clicking on the chat icon. Attention to the disclaimers that guide this presentation at the end of the presentation. [Operator Instructions]

Now I will give the floor to our CEO, Jorge Pinheiro, who's going to start the presentation. Mr. Pinheiro, please, you may start.

[Jorge Fontoura Pinheiro de Lima, executive]

[Technical Difficulty] Good morning. Now we are back on with our audio. Good. Great. Can you hear us? So once again, good morning to everyone, and thank you very much for attending our earnings release for the fourth quarter of 2022. Here, we are together I, Marcelo, Mauricio and entire Investor Relations team. I could not start this conference call without first emphasizing the joy and the satisfaction of presenting to the market the results of a single company which has just 1 team. So this is the landmark of lots of work and dedication to build something unique. And while we get together to discuss the results of the quarter, I would like to take a moment to acknowledge the extraordinary time that we have gone through in recent years.

2022 was no different. Throughout the year, we faced many challenges and navigated a world still dominated by the pandemic. Amidst all this turbulence, I am proud to say that the Hapvida Intermédica has demonstrated its unwavering commitment to a sustainable and resilient business model. Despite adversities our employees and service providers worked tirelessly to improve all operational, care delivery and financial indicators. In this last 2 or 3 months, we have accomplished a lot. We have advanced many actions that should take place in the first 2 years after the major. For example, we have already done the company's strategic plan, including the revision of the mission, vision and values of the combined company. Another example, all administrative teams have been fully integrated already. We have also made a lot of progress towards the company's combined operating systems. With the support of 3 consultancies, we have already defined the technological platforms that will permit standardizing processes, protocols and operational indicators.

We have even started implemented 2023 processes. We have a review plan for the product portfolio that will benefit existing resources and will also increase the verticalization through a series of new care delivery units planned for the coming quarters, including emergency care clinics and diagnostic units. Our teams have been working intensely designing plans involving multiple initiatives in many different areas.

The combined loss ratio of the company, our main operational indicator, remains significantly lower than that of our competitors. Our business model has allowed us to go through these challenging times much more comfortably than the market. Still influenced by frequencies of use and costs that are higher, especially in the credential network, and thus taking over newly acquired companies with efficiency levels lower than ours, the loss ratio was at 72.9% in the quarter and 73.3% in the year, which is a level which is still above our historical levels and our possibilities.

Our budget and efforts towards gradually recomposing our margins in a consistent way. We continue managing well commercial administrative expenses, which helped us to deliver an adjusted EBITDA of BRL 598.7 million in the quarter and BRL 2.5 billion in a year. Our achievements go beyond these impressive numbers. We remain committed to the optimization of our own care delivery network, with a continuous focus on verticalizing our operations and modernizing our medical facilities. In the last quarter alone, we opened 4 medical units and 8 diagnostic and laboratory test units, thereby totaling 761 medical and hospital units spread throughout the country.

We continue to execute our inorganic expansion plan with the recent completion of the acquisition of HAP [indiscernible], have been taken over the company in January 2023. It's been an intense year when we were also able to complete the integration of the company's Promed and premium acquired by Hapvida and Velodyne. Now with the merger of these companies and the deployment of our systems, we have transformed these assets into a powerful regional growth platform and continue to work for smart and efficient cost management.

As to the integration between Hapvida and Notre Dame Intermédica, one year after the completion of the merger, we already have hundreds of initiatives and action plans implemented, and we are excited about the future. While all of us at Hapvida Notre Dame Intermédica Group celebrate our accomplishments of 2022, we look to the future with optimism and caution that are needed to continue navigating challenging times with courage, strength and resilience.

We continue certain that we will fulfill our main purpose, which is to deliver affordable quality health care to the largest number of Brazilians. I would like to take the opportunity to thank Irlau, who together with me along the last year, managed this great challenge. We completed successfully 1 of the largest mergers of the history of Brazil and advanced on the agenda of integration and capture of synergies. Thank you very much, Irlau, and thank you for staying with us, contributing with your experience to the Board of Directors.

Now I would like to give the floor to Marcelo Moreira, who will share with you more details about our operation and financial performance, and our advance in the agenda of integration and synergies.

[Marcelo Moreira, executive]

So hello, I'm going to start on Slide 2 with the main highlights of this first year of the merger between Hapvida and GNDI. So the first year has been a year of very intense work, in which our teams were able to deliver growth in revenue. We have grown 10.7% in the year in terms of net revenue, reaching almost BRL 25 billion in revenues. And this growth is supported on 2 very sound pillars. One of them is our organic growth in membership, and we have grown overall 5.5%, reaching 9 million members, and also because of the important resumption of adjustments, which, in the year, were at 6.8%. And if we analyze only the last 6 months, we can see that in the last 6 months, we grew 6%. So most of this adjustment come from a recent movement, which started in the second half of 2022.

As to loss ratio in the year, we reached 73.3%. We know that this is above what we like, although it's better for the industry as a whole. It's one of our -- one of the main work fronts where everyone in the company as so that we can bring loss ratio back to normal levels.

Our SG&A present a dilution of 0.4 percentage points. And in this manner, our EBITDA reached BRL 2.5 million with a margin of 10%, 0.4% better than last year's number and 15% than the number that we got in 2021. Our leverage is at 2.5x the annual EBITDA, and along the year, along with all the work, we continued our strategic agenda, having invested BRL 776 million in CapEx, very much focusing on the renovation and expanding our own network and also to support the several IT projects that today we have in the company.

In the next slide, we talk a little bit about the integration of the company in this gigantic movement we're phasing. You had an opportunity to follow the implementation of these initiatives in the first, second and third quarter. These initiatives went on in the fourth quarter. And with that, this first thing that we had already determined, which was reaching BRL 47 million in synergies in February 2023, we were able to reach this goal. We actually reached BRL 47 million, BRL 10 million from income synergies and BRL 1.3 million in MLR gains and also in SG&A gains. This movement continues in January '23 -- January and February '23.

We have reviewed the different support areas in vice presidency, and this adjustment was aimed at eliminating duplicities in roles and tasks we had in the company. This was already expected. And with that, we have monthly savings of BRL 6 million, which will be seen as of February and March, and therefore, the expected cost for the first quarter is in the order of BRL 13 million. So you can see that we started 2023 launching the basis so that we can move on going beyond and reach the BRL 81 billion, which was one of the main reasons for the merger.

In Slide 4, we can see the different areas, which will continue guiding us so that we can reach this BRL 81 million goal in February 2024. They were grouped under initiatives, including commercial area, operations, administrative and integrated management. I think that the main message here is that 73% of the initiatives that will take us to the BRL 81 million in gains every month are under different maturation stages, but as we collect the results according to the planning of each and every one of these initiatives.

And then in Slide #5, we can see our net revenue, BRL 6.5 billion in the quarter. And this growth was led by the growth in health plans, where we had a growth of 12.9%. And this is supported by the growth in beneficiaries plus the adjustment, which will be explored in the next slides.

Slide #6, we show you the details of our health care beneficiaries. And in the quarter, we reached 103,000 organic lives or organic sales. Also at oncology. And this was in the fourth quarter alone. When we analyze the whole year, we have almost half a million of new beneficiaries in health care, where 171,000 came from the purchase made in the south of the country and 300 in organic growth throughout the year. With this, in December 22, we reached 9,132,000 beneficiaries. It's important to highlight that this growth permeates new geographies. It permeates market share increases in mature markets where we already work. And more recently, it was further expanded by sales and MDI with consistent deliveries in the last 3 quarters.

In slide 7, you know that we've been talking a lot about how important this new cycle of readjustments is. It started in May 22. It will be important for our recoveries and this new cycle demonstrates that part of it has already been hired and, today, almost 66% of our cycles reflect PME. Individual cases and the percentage numbers are already known. With that, the evolution of our gross mean ticket reached in the last 12 months, 6.8%, where I think that the important highlight is that price and mix advanced 7.7%. It was even faster, but we still have some challenges in terms of the readjustment we had last year, which was negative and also the impact of the M&As, the last 1 with CCG, which also had smaller or lower mean values.

The combined ticket for the whole company, can be seen here, but it's important for us to provide you a closer x-ray, where we can see that, in the last 6 months, in other words, after this new cycle, we've seen a combined growth of 6% in 6 months, which is aligned with our main guidelines. And this is something we've been talking about since we announced these readjustments.

Now on Slide 8. In 2021, which was dominated by the pandemic, and we saw fluctuations that were allowed to the pandemic. I would say that '22 was a transition, marked by higher mean costs. So in the fourth quarter, what did we see? Basically, we observed a deacceleration in the cost increase rates, but they still remain because of the inflation rates that were passed on, also the therapies and costs and also high-cost procedures in our contracted network, which requires a lot of attention.

So how can we find this loss ratio? We have hundreds of initiatives, but one of the most important things is our verticalization strategy in Slide #9. You're very familiar with the app Vida, mature operations, the levels of verticalization we've already reached. You can see it on the slide. And that's within the NDIs and the HMO operations where you can see that verticalization is progressively increasing so as to make it more dynamic. And so from '22 to '23, the company took 2 important steps. #1 was the creation of the regional area #3, including Mina Gerais, Rio and the Saúde. We can see virtualization and integration and the virtualization initiatives are being monitored by a very senior and experienced team, which is working and leading these initiatives. And we are actually working with some idea as to unify brands, which is the case of the Balarezonti metropolitan region so that we can, in fact, accelerate this integration.

Furthermore, we created the new presidency with a matrix approach, which will develop benchmarking for the 3 different regions, and it will help us in the process of verticalization and loyalty. An important focus in this new Region 3, including the recently acquired companies, but also the virtualization activity in São Paulo and other regions remain. This is our new emergency department inaugurated in February in the neighborhood of [indiscernible]. Virtualization in São Paulo goes beyond medical visits and it also includes diagnosis and small procedures.

In Slide 11, our administrative expenses. You can see in the fourth quarter that they reached 8.3% of our revenues. We have a benefit here of the reduction of our liabilities in the purchase of the premium account in [indiscernible]. So even if this benefit is taken into account, you will see that we reached 9.6% in administrative expenses, going back to the levels we had in the past, and also our trajectory of cost reduction. We want to have a more efficient and lighter administration. In this quarter, the business expenses have reached 8.1%. But when we divide this number, when we break it and analyze item by item, we can see really that increases all of the income from a single account. PDD, which was seen in medical services reflecting a point in time where the market payers have been more affected and demand higher PDD.

Now you can see our EBITDA in Slide 12. It represents a decrease of 9.2% when compared to the fourth quarter of 2021. However, it also shows a resilient ETRA even within this very challenging context. In the fourth quarter, you can see that we had a provision of BRL 44 million, but in the year, they totaled BRL 66 million, which is lower than we had expected. I think this is because of the end of the pandemic, and we also had resource provisions reaching BRL 65 million. With that, we reached an ETRA of BRL 580 million.

And I would now like to turn over to Mauricio. He will talk about our cash flow.

[Mauricio Teixeira, executive]

Thank you, Marcelo. Good morning, everyone. We're now facing very high interest rates in the country. It's important that we get into the details of cash generation and debts so that we can continue the effects and explain what happened. When you start with an ETRA, which has already been reduced, and this can be seen in the graph on the left, we had a reduction of our operational cash, and we can also see an increase in receipts from clients. First, there is a new revenue mode that has made us have a time of stabilization along the fourth quarter with some delay in the billing of some customers, rebilling considerations and we needed to change maturity times. And then instead of getting paid in the quarter, we needed to postpone it to the next quarter. So this impact of the implementation of the system in relationship with the customer has had an impact of about BRL 80 million.

In addition, we have more turnaround to receive from sale of hospital services to other carriers. And so there are some other health carriers. And as we can see in [AMF], it's difficult for everyone. Everyone is tight on cash, they are denying, so it's taking slightly longer for us to receive from other health carriers. And there is a higher default rates in the portfolios of individuals and SME. So it's down by 1 percentage point in terms of historical losses from these customers. So -- but this is related to losses. But in the first brackets of receiving, there is more turnaround until losses are released. So we don't know how this is going to go in the future, depends on the macroeconomic scenario in the country. In addition, we have BRL 116 million of the Christmas bonus. So it requires cash. It's 112. It's a liability, the needs to be booked and it's booked once we -- in the fourth quarter once we pay the first and second installments of the Christmas bonus. And this has taken up a lot of cash coming out from the EBITDA.

There is another difference of the EBITDA for cash generation due to IFRS 16. And as a reminder, lease affect results below the EBITDA. But in terms of cash generation, it takes up working capital. There is also the natural dynamics for the recovery of growth that we have here. So there is the commissions that we pay, and this is a deferred bottom line in terms of average times for contracts, and there is an advance of cash of BRL 29 million. In addition, there are BRL 7 million of income tax and social contribution, a level that is very well under control, and we are using our goodwill here on the right. We have the goodwill plus value-added balance, so we have an MDI still BRL 7 billion goodwill to be amortized and Hapvida BRL 5.5 million, 34% of this will be in the cash rate of income tax, and these credits will be used along 2023 until 2025.

And with the merger and acquisitions that we are implementing along this year and next year after 2025, and 2024, we have a goodwill of BRL 36 billion, 34% of that will be cash credit for future taxes. We have income tax, BRL 9 million of M&A, which is the reason of contract installments of guarantees for hold back. And as they mature, we have partial releases, the main release here for the acquisition of medical, BRL 9 million. We have BRL 236 million cash. So CapEx is still more stronger and faster. And we know that we have the cash that is -- the CapEx is controlled and budgeted for 2023. But in 2022, it was quite strong because of the level of expansion and verticalization and the development of systems that we implemented. So at the end, we ended the quarter with cash consumption of BRL 224 million.

And if we reconcile net debt, on the top right-hand graph, that went from to BRL 6.4 million to BRL 7.1 million, so BRL 224 million was cash burn especially because of working capital and CapEx. And going back, we have BRL 87 million of M&A in liability reduction because of the premium BRL 87 million, an increase of BRL 99 million because when we adjusted ProMed for BRL 44 million last year, we created an asset that -- receivable. And this is a reduction for the M&A liability and part of that materialized in terms of shares that were in treasury and not cash.

So it went down from the liability reduction. It increased the liability, and so these are BRL 99 million in treasury shares, and we have BRL 398 million in the financial result, so BRL 7 million and all the interest rates based on debentures, and we also have BRL 100 million of temporaneous. BRL 36 million of fiscal themes. So here, what we do between the different health plans and holding to gain efficiency. So we declare interest on equity, and we have payable taxes, and then we have tax credits to make up for that. So it optimizes tax credits, but we still have fiscal themes. So this effect alone was BRL 36 million. There's another BRL 18 million of equity swap, and we approved swap program last year, in which there is a marking to market and shares went from -- September '22 to December '22 from BRL 7.77 to BRL 5, and so this had an impact in our financials with a negative impact of BRL 18 million that we have payable to the counterpart, which is the bank that did all of this.

We also have another extemporaneous item here related to the swap of Cree that was issued in 2021. We issued BRL 1 million per year, that was swapped for [ 113% ] of the CDI, and we booked it in hedge accounting. And what happened is that, in 2022, all the adjustment of Cree was done at appeal and it should be just marking to market on the PLN and the -- so we're pending on BRL 37 million that were in the PLN, should be in the financial results of the third quarter and was approved in the fourth quarter. So we accumulated 2 months or 2 quarters of the Cree swap.

And then this is for the liability. So this is extemporaneous. It's approved and everything is right. So here, we have another BRL 100 million and all the rest is normal. So with the financial reset, we went from BRL 6.5 million debt to 7. There is a ratio of 2.45 well below our covenants, which is 3x, which makes us confident considering that we have this buffer and our debt cost is low. Our strategy -- we have a strategy for margin recovery and cash generation. So we're really okay in terms of our financial commitments.

As you can see here on the right-hand side, you can see our debt profile, very equalized, very strong cash position, with BRL 5.8 billion, and everything is very well distributed along time, BRL 1 billion to BRL 2 billion between 2023 and 2029, with amortizations that are small, just in the second half of 2023, so have very strong cash positions for all maturities and have prepaid BRL 116 million of debt from [indiscernible]. In the first week of 2023, we have also paid BRL 620 million for the acquisition of [indiscernible] Saude in January. And last week, we had announced a new fundraising of BRL 715 million so that we go back to the conservative cash level that we like to work with considering the recomposition that they can buy payments and [indiscernible] and all the commitments that we have for the second half of the year.

On the left-hand side, we have examples, some liability management. We paid some of our most expensive debts at the level of CDI plus 3. And now we have new debts at the level of CDI plus 1.60. And then we have the CDI plus 0.31. So in this manner, we could increase the duration of the debt from 3.7 years to 4.7 years, reducing the CDI cost from 1.76 to CDI plus 1.52. So we are managing our debt very well and with a very good cash position.

I would like to give it back over to Jorge I would like to thank Marcelo and Mauricio for all their explanations, and now I would like to open for questions and answers. It's been a challenging year where loss ratio was well controlled, above expectations, but with many initiatives that we are going to implement, and we want to bring it back to historical levels. And then we had a strong growth. And then in the 3 quarters and with the recovery of the average ticket in the implementation of adjustments showing that the composition between actions for cost reduction, and recomposition of ticket lead us to the best way. We are very disciplined in terms of G&A, and so we want to dilute it more and more as we grow. And I would like to reaffirm our strong commitment of expediting all integration actions that we have implemented and the last few months have been very intense working a lot in that direction, showing that we are on the right track to have this platform at national level with our own network of service, allowing us to deliver products that -- with very good quality and very affordable.

And thank you very much for your attention, and we are now available for questions and answers.

[Operator]

[Operator Instructions] So we are going to answer our first question from Leandro Bass to sell-side analysts.

[Leandro Bastos, analyst]

I have 2 questions. The first 1 about the loss ratio. And you said that in the fourth quarter, there is a growth in cost going down, but still at a high level. Could you give us some color of what you've been seeing now in the end of the year? And how you're seeing the normalization for 2023 in terms of loss ratio? This is the first question.

And the second question, talking about adjustments. Could you also tell us what you are expecting of adjustments from different channels as of May this year comparing it to last year? So is it similar? What about prices?

[Unknown Executive]

Leandro, thank you for your questions. You're going to start with the loss ratio. And then Mauricio is going to talk more about price adjustments. So as I said, with a slightly broader answer in the last few weeks or months have been quite intense. We were able to dive deeply in assessments and planning and strategy and in details of hundreds, hundreds of initiatives that will permeate the 3 new regionals that have been created. So we have 1 first region that basically manages the original Hapvida operations. We have created a second region, basically São Paulo and surroundings. These were the original NDI operations and the third region with about 1,200,000 lives, encompassing the south of the country, parts of the Southeast and especially comprising the newly acquired companies. So how do you see the loss ratio behavior in these 3 different regions? And here, there are many details about the plans that we have to make the loss ratio drop consistently.

For the first region, and the 1 that original Hapvida operations because of its high level of recognisation, we see that the practice of the composition is going to be faster with fewer resources from third parties, and we can see that frequencies have been going down along the first quarter, and they're going to be reflected along the next few months and quarters. We can see that Region 1 will go back to historical levels more quickly. #1, it's important to keep our discipline in terms of the readjustments. And #2, there is a series of detailed actions that are more scattered and combined they will make this region move faster in terms of imaging.

In terms of the second region, I would divide it into 2 parts, HMO, which represents the largest part here in São Paulo, is a virticalized operation, but with lower verticalization levels when compared to Region 1, and therefore, it is more suspectable to the accredited network, which works differently. So what is our remedy here for the HMO operations to increment the verticalization levels, and Marcelo has just presented us a beautiful action in [indiscernible] offering visit, tests and so on and so forth.

But beyond that, we have a series of new units that have been approved and they will strongly increment the level of verticalization in the HMO operations in Region 2, and therefore, in Region 2, the main actions, the ticket composition, the increment of verticalization, and we still have a long implementation plan, which has already been detailed and presented. And then finally later on, the use of technological platforms. The second part of Region 2 talks about PPO products. And as you know, this is exposed in the accredited network. We'll talk a little bit over 500,000 lives. This is more flexible in the readjustment process. Here, we can see the behavior, and we are more exposed to a third-party network and not our own.

So here, we can see all of the details that have been implemented this year. And then, #1, we have an understanding that the PPO products complement our product range. And they are not the main part of our products. They are important products, but they are complementary. Our strategy is to decrease the level of exposure and work closely to products that we can control better and that are more verticalized.

Over time, we're going to decrease the level of exposure to PPO, and we're also going to be very disciplined in the sales process and in the readjustment of PPO products. And we still have some room for verticalization within our expansion plan, for example. We have a new hospital here in São Paulo. It will be ready in 2024, with more units for diagnosis, and they will increase the level of verticalization in the PPO, but these are the main remedies.

And finally, we have Region 3, as I mentioned before, that include new assets. And they have to do with a lower maturity levels than the usual ones we have because we're talking about small and medium-sized companies in the South and Southeast. I'm talking about Rio Grande do Sul, Santa Catarina, Parana, Rio and Minas [indiscernible]. And here, we have operations that have a higher loss ratio. The remedies here are a little bit different. #1, the understanding that we have a possibility for a very high level of verticalization. And this is one of the remedies dedicated to the almost 1.2 million lives.

Here, we have less mature operations according to the level of standardization and verticalization, and therefore, the first remedy will be the implementation of a plan, which is already detailed in terms of virtualization. For example, now in Belo Horizonte, in the second quarter, we're going to inaugurate 3 units, which will allow us to have hospital services with a lot of productivity in Rio Grande do Sul. We have a series of actions, which will allow us to quickly work with verticalization. And here, we have a more accelerated area. And this is part of the characteristic of the projects and this is part of the integration of the assets.

And then, in 2023, we will integrate all of the assets, and we have different gains with the standardization of processes, protocols and so on and so forth. And then we have the recomposition of the mean ticket. With that, we have more visibility and this is something that was done in the end of '22, early '23. This was used in different regions. And we have different remedies and they will allow us to define what we're going to do. These actions, for example, the main ticket, the verticalization process for the implementation of actions, the implementation of systems, we already have a whole schedule for that. The plan is very detailed for each one of the departments, and we are confident that in the next quarters, we will have a recomposition of historical margins respecting new acquisitions.

This is a long answer, and I apologize for it, but this is very important. Now in January, we can see a level of loss rates, so that has an integration plan, which will last 18 to 24 months. Verticalization of the systems, and this is done to bring more efficiency to the asset. In the upcoming months, we will probably have another acquisition. We have to respect the new assets and also the ones that have a lower level of maturity. Now I would like to turn over to Mauricio.

[Mauricio Teixeira, executive]

Thank you, Jorge. Leandro, thank you for the question. I will now talk a little bit about the readjustments according to the different segments. We have different timings and the individual level of the expectation we have, is a readjustment in the order of 10%, and this will be done in April. We have to take into account the loss ratio in this segment, but we expect a readjustment of 10% to be valid as of May. And then because we have different operators that are independent, the cases are individualized and they will vary with a readjustment ranging between 15% and 20%.

Collectively, what we can see is that in the first quarter of last year, we kept a level of 8% to 10% and then 10% after that, and then we remained with mean readjustments of 12%. And therefore, this is a priority in our contracts. The dynamics are different, but we can see here an amount of 12%, the readjustment is consistent throughout the portfolio.

[Operator]

We're going to move on to our next question from Vinicius Figueiredo. He works at Itau BBA.

[Vinicius Figueiredo, analyst]

I wanted to start with a quick follow-up. I think we are now in early March and I would like to know if you can tell us if somehow this fits into the readjustments you have mentioned. A second aspect I wanted to mention has to do with the cash generation. Mauricio talked about this, but we did not expect the company to have a deterioration in the operating capital of the company. And I wanted to know how much this was affected in the hospital services and if this will continue increasing or if the coverage level that you have now is enough for this worsening that we can see in 2023. What are the main aspects here?

[Jorge Fontoura Pinheiro de Lima, executive]

I will start here, and then I will turn over to Mauricio to complement your question or to answer your second question. In the beginning of this year, we started doing this. This is too soon. We've only been doing this for 1 month. And therefore, we need to wait and watch to see what will happen in March, which is a varying 14 months. And also, what we've seen regarding today's volumes, and I'm talking about the days we're going through now, because we've seen a reduction in the number of visits and elective tests, but we'll still have a higher number of surgeries.

This means that we have an indication that this starts with elective visits and then after that, we have all of the tests and then the surgeries carried out some days later and the bill is paid for later on. This is a cycle. And it may take 5 months from beginning to end, and this is the natural flow for surgical procedures. But now we've seen lower volumes. With persistent volumes, we need to have some more months to understand, what will happen and perhaps we will have lower surgery volumes. Well, Vinicius, we're talking a little bit about cash generation, seasonality. But when talking about the client, approximately half of the impact had to do with the implementation in the new system, bringing stability in our client invoicing. And the pending amounts from one year to the other have been received. We've already seen our cash generation in January and February. And we've also had some recoveries since last year. And we have received from one major carrier reducing this level and they had a dedicated resource to monitor billing, wholesales, [ fort ] carriers.

And then they use our hospital services. So they don't want to let this program deteriorate. Now thinking about individuals in SME, so there was a deterioration late last year. And it got to a level with provision for bad debt, which increased quarter-on-quarter, but there is some default rates, and we are seeing a reduction in February. So it seems that the first bracket that then are going to go from 60, 60, 90 and there are provisions, they are coming at a lower volume than there was a deterioration.

So we're seeing the first bracket going back to normal. But with the other carrier, we see some movements in the turn of the year with some major customers. It's natural. It's kind of traditional that they want to use it for working capital. Everyone is tight on cash, they're leveraged. They don't want to pay in December, and then they pay on in January. We see major networks that are our customers, and then they delay their payments at the end of the year and they pay at the beginning of the year only. So they are normal to January. So I don't see it with great concern.

[Operator]

Now we are moving to our next question from Gustavo Miele from the sell-side analyst of Goldman Sachs.

[Gustavo Miele, analyst]

I have 2 questions to ask. The first one in terms of the profile of lives in this quarter has marked a significant change in net of additions and with synergies gaining greater protagonism. So my question is in the economics. And so can you share with us a ticket and margin with a new contracts and how they behave in relation to the more mature portfolio of the company. If you could share with us in terms of geography relating to these lives and synergies and organic lives that are legacy from more mature portfolio. How are they geographically distributed? Is there any risk of cannibalization considering the organic number that is slightly weaker than we were expecting?

And number two, if you allow me. Going back to the discussion of provisions. Could you share with us who are the offenders for the acceleration for provisions for bad debts? Well, [indiscernible] have mentioned the macro components and everything that we have in the system effect affecting this variable. Do you see any impact in terms of the portfolio of the company? Is there any room for you to change slightly your commercial strategy in the future, trying to reduce your risk, even if it means kind of a slowdown? And could you share the impact of the newly acquired companies in the provision for bad debts?

[Jorge Fontoura Pinheiro de Lima, executive]

I think that and to address it in the best way possible. First of all, talking about the profile of the lives that we are bringing in. And in this quarter, the national scenario have had a more prominent wait. And as I said before, the National Solution was designed for us to offer a scope of geography footprint for major customers and in the months that we are more successful.

Sometimes, we include a large customer and it gains a heavier weight in the overall mix. It doesn't mean that we are shifting the balance. No, it doesn't. Our strategy remains the same, in which we're likely to favor products that have more of a regional flavor. Meaning, if we look at our product portfolio and the products where the main payor is SME or individuals, to us, these are the most profitable products.

Today, in the company, we have clear initiatives where our intention is to keep the pace of growth within these 2 portfolios that are stronger portfolios. Now in talking about geography, it's kind of difficult. Of course, when we leave the National Solution and go to [ MDI ] sale of individual products, so basically, we have Sao Paulo and Parana, where we've been selling a little bit for corporate sales follow the formal employment. So this distribution I think that the snapshot of the fourth quarter is a result of us including a major customer that ended up having a wait, but I would not say that this is a run rate from now on.

We're still seeking this portfolio that is well balanced for us in terms of products. So talking about provision for bad debts, so separating in 2 different segments in the sales of services, we want to be closer to health carriers. We see them with lots of difficulties. And so we want to work together and to be available, so that we don't take on working capital for customers that may not pay us. So we are very close to the sales. We are monitoring sales closely. We want to understand why they are not paying, bill them, maybe stop providing care.

Now when we talk about the health plan carrier, the main risks are individuals and SME. So there is a whole economic crisis. So major banks providing services to these banks. And this is a structural issue of the country, and we hope it will recover a long time. But we are reinforcing major billings. We are suspending services, but in terms of provisions, this is all very much in line with -- in line with the consumption and income of our target public.

[Operator]

We are now moving to our next question from Joseph Giordano, sell-side analyst of JPMorgan.

[Joseph Giordano, analyst]

I have 3 questions. I want to go back to the issue of sales profile. So when you look at the new contracts in your portfolio, do you already see any kind of substitution? So historically, your price increases is below the average that we see in your industry. How do you see the gain of share maybe to have a more efficient solution in terms of cost management?

And my second and third questions are related to costs. So number one, we talk a lot about frequency, but I would like to understand how you have been seeing the new coverages, so the change in the list, changes of therapies as offenders in terms of claims, something which might explain part of the frequencies in terms of the repressed demand related to the pandemic.

And last is a theme that comes back and forth, which is related to nursing. Sometimes it's present or not. It comes and goes. What are you seeing in evolution on that front? And how does that impact, an impact that you could have in the industry? And how much would it affect and be offset by measures that you are negotiating in the back?

[Jorge Fontoura Pinheiro de Lima, executive]

Thank you for your questions. So let's talk about the -- our membership profile. Number one, because of all the movements that we made, we have a network with nationwide footprint, we are present in almost every capital in the country with our own network, not just hospital and in many of these cities with a very vertical network. So what brings us? So it's this chance of being able to sell in every channel in a very competitive way.

So because we want to sell with little exposure to our network, affinity, SME, midsized and large-sized companies, we can sell in every categories in all major cities in Brazil. So what about the new lines? So these past few months, corporate has been the strongest segment. And we are bringing in important clients that were in insurance market or much broader network than we have. And this reinforces very much what we are doing and really reinforces our plan on investing more and more, not just in verticalization, because verticalizing is about having our own hospitals, but much more than that is to have integration actions to have a unique care delivery logic from diagnosis, hospitals and everything, being able to identify higher cost uses and thereby gain predictability.

And so because of the demand from major customers to us coming from broader products with more free choice. On the other hand, our main work in 2023 will be to set the priority to sell more vertical products. So we have more than 24 or 25 beds coming from our expansion and acquisitions and merger, beds that are idle that are activated at any point. With the presence in many different centers, not just capital, but also other important cities. This is one of our main plans for the year, our initiative is to develop products in these micro regions.

And lastly, to reduce the exposure to products that are very open. To make it clear, we are going to go and have PPO products in our portfolio, but in a complementary way, reducing our level of exposure and focusing on what we are going to need. So all of this reinforces our thesis, our belief that our business model that is vertically integrated, preventive, technology-based, will continue to provide sustainability to us and make it possible for us to whatever easy economic scenario will benefit from that.

So in answering your 2 other questions relating to the list in therapies. Definitely, the list, we are not seeing much of an impact in our operations. However, in therapies, yes we are seeing there has been an increase, especially therapies for autistic patients and also in our own network. So this year, we have built a care delivery group that is going to develop the best technologies and care delivery protocols for this public, so that we can reduce this impact that is now more perennial and it's for the whole country, especially for autistic spectrum disorder and the care for these people.

And lastly, noting I would like to reinforce the importance of this category, it's a main stay of everything that we do. It's a beautiful occupation. My mother is a nurse, and she -- they define the key tone of care delivery in hospitals because they're there all day long with our members, users providing care in a unique way. But the main thing here is funding. It is a category that requires a lot of attention, but something that the country must do for the sustainability of the different municipalities and hospitals. And the sector in special is to find different and sustainable funding sources. And it seems that we have not found them yet. And this has to do with where they could come from to sustain this category.

[Operator]

We're now going to move on to our next question from Mauricio Cepeda from Credit Suisse.

[Mauricio Cepeda, analyst]

I have 2 questions as well. The first one has to do with the ticket. I understood what Mauricio said. There is a trend towards the increase in the corporate adjustments. I wanted to understand what has prevented a faster recovery since there is a pressure on the gross margin, which is something that happens not only to you. But I wanted to know whether these are budgetary issues related to clients and what competitors may somehow be preventing a rebalancing of this area. So my question is about this in the corporate area. Number two, I wanted to congratulate Jorge when he divided the different regions of Brazil. It was much easier for us to understand it like that. But I also understand that one of the good remedies, so that we can reach a large part of the country is to have verticalization. On the other hand, we understand that you have higher debt. You're trying to deal with cash generation. And I also understand that you have held CapEx a little bit.

So how do these things communicate? The need to verticalize versus the need to have cash generation?

[Jorge Fontoura Pinheiro de Lima, executive]

So the first question is a main ticket. The main mission of our company is to do this in a way where we can deliver quality products. I think that it's important to have a balance among these 2 fronts. It's important for us to think of our historical margins. We are going to be very disciplined in '23 in terms of readjustments and repricification. But this is even twofold higher than the inflation in the country or even 3x higher. And it will help us in these 2 areas, the recomposition of the main ticket and we have another front with different actions, integration, dilution. There are different actions, including the recomposition of readjustments 2x to 3x more or higher than the overall inflation.

And over time, and respecting the different processes, optimization and efficiency.

And regarding the second question, how can we increment to the different verticalization levels. It's important to remind you that we made a series of investments last year, Mauricio just told us that we had a very strong CapEx. We have reserved BRL 400 million for 2023. And also as a result of the acquisitions we made, we have a lot of empty beds, and some of them are even redundant. And we have some duplicity. We have areas where we have a higher offer of beds.

And in terms of verticalization, we will rent units which are already ready to work without patients. And in some other areas where we have like emergency units, we will move on with more complex units, more tests. We will have some opportunities throughout the year in this modality. So we have modalities with lower complexity and the focus of engineering will be readjusting all I've said. And combined to that, we have the investments in CapEx of over BRL 400 million. We are very specific in our activities in the regions where we should have less exposure to the accredited network

[Operator]

Now we're going to move on to our next question from Vinicius Ribeiro, UBS analyst.

Mr. Vinicius is no longer here. So I'm going to move on to the next person. Ricardo Boiati, Banco Safra analyst.

[Ricardo Boiati, analyst]

I have some quick questions here. The first one is a follow-up action regarding the readjustment process with prices and the impact that has on our ticket. With all of the comments that have been made, I was thinking about the impact when we look at recurring loss ratio. And if we remove the impacts of COVID relative readjustment, we can see a consistent worsening after different quarters. And there has also been a more marked worsening in the fourth quarter.

It seems clear that there is a relevant imbalance between price and cost. And apparently a good part of the readjustments made throughout the cycle have not been enough where we have a cost pressure. Now what you said was very clear. You have a more proactive attitude with higher amounts and they seem to address all of these issues, but this process should take some time. And therefore, we can consider that these adjustments will be seen at the end of the next cycle, which starts on May 2023. And so you will be seeing in early 2024. Is this a scenario you foresee for the short term? This is my first question.

The second question is whether you can quantify it a little bit in terms of all of the therapies and the different strategies. If you can quantify how much this has affected the loss ratio?

[Jorge Fontoura Pinheiro de Lima, executive]

Hello, Ricardo. Thank you for your questions. Regarding the speed and the timing, we -- that this should happen because once again, we must respect the timing of these very different activities, and we have tried to share this with you and all of the remedies that we're going to be giving for each one of the products. It is a fact that the readjustments and their combination and the different measures that have been taken will help us with the more verticalized actions, and they will have a faster recovery than the other ones.

And that is why one of the most important actions this year will be to increment the level of verticalization and integration of the different units. We know well how this process works, how we should have an integration, how we can define payment systems and integration with the network, because we are confident that this is something that will lead to results, but the results are not always collected the next day. It's a gradual process. It must be consistent and continued. Some regions move faster than others.

And on the other hand, we have new assets taken into account. We have a potential to reduce the loss ratio in the upcoming months or within 18 months, but it's a journey. We have different assets with different levels of maturity and action plans that are adequate for each one of them. And we will have some gains as they are implemented.

Now regarding your second question, yes, therapies, our new therapies do entail some pressure. They vary according to the different regions, and they vary a lot in regions that have not been very affected. But the most important thing is for us to say that this is something that was specifically created with that purpose. We also have a verticalization plan, including different units. We will inaugurate that in the next quarters. And with that, we will be able to better control it in face of our ability to have more efficient protocols, controls.

[Operator]

Our next question comes from [ Fred Mendes ], sell-side analyst.

[Frederico Mendes, analyst]

And I think that Mr. Pinheiro has already addressed it. Could you tell us what you think in terms of price and for you to grow 15% a year, 10% in the price, 5% organic or 15% pricing, 0% organic, is it the same? Do you think there might be a sharper price increase even at the cost of a small organic growth in the next 3 or 5 years, what would be your priority?

And the second question is whenever there is a price increase and a cancellation, where does this member usually go? So 50% goes to SUS, is there a competitor, the risk of increasing price and what is the possibility that members have, if you increase prices? Where are they going to go?

[Jorge Fontoura Pinheiro de Lima, executive]

Fred, thank you for your question. Well, this year, especially and I'm trying to make it clearer to you. We are going to favor and have a stronger discipline in terms of pricing and adjustments, because this is an atypical year. So this part of ticket recomposition is related to the actions that we are implementing, so that we can go back to historical margin levels. So this is what we aspire to in our industry.

Our company has unique possibilities considering many companies that have been recently acquired and in terms of technology and everything. So we have inhouse that are unique that can and will place us at a special place. So this year, we are going to have even greater discipline in recomposition of ticket, in terms of pricing and adjustments. And we are going to be more careful so to speak, to use more discipline in that area.

But then on the other hand, we -- as part of our portfolio along this year, we are going to favor more verticalized sales. The portfolio that we can control better, that we have more control of the care that is delivered, which will necessarily have average tickets that will be lower, so we are going to sell less PPO, we're going to be more selective in PPO, we are going to price it better. And we are going to favor our own resources in the 5 regions with our own hospitals that has spread throughout all the 5 regions in almost every capital.

So this year, we are going to start the implementation of a new sales portfolio. This is going to take place along this year, and we are going to favor our own resources with less exposure for the accredited network. But the market, again, the market varies. Yes you must remember from previous calls, small- and medium-sized health operators being more aggressive in a way that is not really -- that wasn't really sustainable in the past. But invariably, history demonstrates and show us that in the past, members that went to middle size and small health carriers, they come back after 1 year because it's not sustainable for them.

And when we note and we look at our numbers, and relate them to what is going on around, we see that any initiative of any other company. With commercial aggressive, it doesn't fit their cost structure. They are really shallow initiatives. I'm not looking down on the competition, no way. I think that there is a competition. They are all worth merits. But considering our possibilities, we have sustainable possibilities of being more competitive commercially speaking, considering our business model and considering the overall competition and numbers are clear for us to assess and there was such a strong pressure on the competition.

Many companies with a degree of loss ratio that is higher than their revenues, it's not sustainable. So work that is not based on a sustainable cost base is likely to be more fragile.

[Frederico Mendes, analyst]

Great. Mr. Pinheiro, if you could follow up the dynamics of the sector? So sometimes they go to the competition and come back. So what would prevent you for -- prevent an even more aggressive price policy, so 15%, 20%, so these members are likely to come back to. [indiscernible]. Why, when there is pressure for everything. So why not having a more intensive price increase?

[Jorge Fontoura Pinheiro de Lima, executive]

So this year, depending on the channel, considering SME, for example, this will vary from 15% up to close to 20% in some situations. In corporate plans, it is slightly smaller than that and there are other strategies. For example, the adjustment process is customized. You can reduce the network, increase copay. If the company does not want to increase the average ticket, we have other alternatives, changing the network or copay. So it reduces cost and recovers margin.

So this year, as Mauricio said, in the individuals should be something around 10%, more or less, according to [indiscernible]. More retail products, 12%, 15% and in some portfolios, even higher than that 17%, 18%, and for corporate blends and then it's customized depending on the need of each company. But yes, there will be strong adjustments this year, respecting the calendars and especially considering the inflation, which is a benefit for us.

[Operator]

We are now moving to our next question. This is from Caio Moscardini, sell side analyst from Santander.

[Caio Moscardini, analyst]

I think that we've talked a lot about loss ratio dynamics. What about expenses? Could you share something with us, especially in terms of G&A, what dilutions can we expect for 2023? There is lots of opportunities for you to capture there. After integrations of administrative teams, can you share with us some level of dilution and the prospects for 2023?

[Jorge Fontoura Pinheiro de Lima, executive]

Caio, thank you for your question. Yes, the company sees a trajectory of dilution. So this is well mapped. Obviously, this is not something that we can do immediately. There are some movements that are important that started in January this year, and there is a review of everything that was almost duplicated. It was doubled and we unified it. So it provides a synergy to the company, but we also see some others -- some other synergies that are going to take place along the year as we implement our projects.

Some of them are related to system implementation, some synergies are related to unification of some areas that have not yet been unified such as call center and everything, the things that we are planning, so that we do it very easily with no hurry. So there is a trajectory. And along with all these initiatives, we have a very strong discipline. We are very much committed to be able to, as I had said before, have a leaner and more efficient company, especially on the front of G&A as a whole.

[Operator]

The question and answer session has now ended.

[Irlau Filho, executive]

So our conference call to announce the results of the fourth quarter of 2022 of Hapvida has now ended. Our Investor Relations team is still available. Thank you very much for your attendance. And have [Audio Gap] [Statements in English on this transcript were spoken by an interpreter present on the live call.]